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Credit-card fee outrage rising as economy slides

PUBLICATION: The Lethbridge Herald
DATE: 2009.01.31
SECTION: Business
PAGE: a1
BYLINE: Newswire

Credit-card fee outrage rising as economy slides


Calls are rising for government action to scrutinize and control fees charged on credit cards.

The Retail Council of Canada said Friday the system "is failing many Canadians," while the Canadian Community Reinvestment Coalition accused the federal Conservatives of "negligence" in bank regulation.

"At a time when many Canadians are struggling and businesses are challenged to decrease costs while still providing value to their customers, the fees charged by credit card companies and the banks that issue their cards are increasing," stated Diane Brisebois, president of the Retail Council, representing more than 40,000 store operators.

The merchants' group endorsed Senator Pierrette Ringuette's call for an investigation by the upper house's committee on banking, trade and commerce.

There were signs that bankers have heard the clamour, as TD Bank (TSX:TD) promised Friday there will be "no new fees and no fee increases" for the rest of 2009 on credit cards and other personal and small-business products. TD also aborted a $35 fee it was planning to impose on inactive lines of credit.

"We've been listening to the concerns our customers and employees have been expressing, and we believe that this commitment is the right response in the current environment," stated Tim Hockey, president of TD Canada Trust.

But the retailers' group says existing card fees include an enormous hidden cost for average Canadians, amounting to $4.5 billion or more annually.

Among other things, they're demanding to know why the fees merchants pay on credit card transactions - as much as two per cent - increase proportionately with the size of the purchase, when a large transaction and a small one cost about the same to process.

The left-leaning Community Reinvestment Coalition, meanwhile, called this week's Conservative budget proposals on credit cards and bank lending weak and negligent.

Coalition chairman Duff Conacher noted that credit cards have become an essential service - it's hard to buy an airline ticket or rent a hotel room without one, for example.

And he said the government "is continuing the negligence of past federal governments by subsidizing the big banks and other financial institutions with hundreds of billions of taxpayer dollars while failing to effectively require them to maintain loans to creditworthy customers and serve everyone fairly and well at fair prices."

The Community Reinvestment Coalition favours requiring banks to prove through independent audits that their credit card and other interest rates and fees do not amount to gouging, with a public report issued by the Financial Consumer Agency of Canada.

The card industry is dominated by two providers, Visa and MasterCard, which work through the banks and other issuers. The business is still growing fast: the chartered banks tallied $53.4 billion in card balances in December, up 5.3 per cent from November and 10.1 per cent from a year earlier.

And credit card interest rates are hefty - typically 11.5 to 19.75 per cent through the banks, depending on features, and 28 per cent on specialist retailer cards - although no interest is paid if the balance is paid in full each month.

Cardholders also face a forbidding tangle of charges: the Retail Council says 55 per cent of Canadians have a poor understanding of card fees, according to a recent poll it commissioned.

Card agreements tend to feature complex small print, and their shakily understood concepts include grace periods - the time before the card company starts charging interest on new purchases. It's normally two to three weeks unless there's an outstanding balance from the previous month, in which case interest starts accumulating immediately.

Finance Minister Jim Flaherty's budget promised, without giving details, to enhance consumer protection by requiring a minimum grace period.

But a big hidden item is the so-called interchange fee, a percentage of each transaction.

This varies with the size of retailer, type of card - premium cards cost more - and other factors, but the Retail Council says it can hit $2 of every $100 spent, totalling an estimated $4.5 billion for Visa and MasterCard in 2007.

The retailers say Canadians pay some of the highest interchange fees in the world, compared with less than one per cent in countries such as Sweden and Australia.

But don't blame the banks, said the Canadian Bankers Association. Interchange fees are determined by the card companies, CBA spokesman Andrew Addison said in an email.

And fee regulation in other countries "has only proved to harm consumers," according to a Visa Canada information package.

"In Australia, where interchange levels are regulated, retailers have increased their profits, while consumers have lost card benefits and choice. Consumers are also paying higher prices due to the check-out fees retailers can now charge."

Tim Wilson, head of Visa Canada, stressed in an interview that interchange fees are paid between financial institutions, so they do not benefit Visa and "don't flow through to merchants directly."

He observed that card interest rates are set by the banks, and said retailers benefit from electronic payment because it encourages people to buy and provides convenience and quick payment.

Asked why the fee varies with different types of cards, he explained that "premium cards are issued to the highest-spending consumers ... and they're the cards that drive the most value for the retailers." He added that "we don't determine interchange based on cost and cost structure; interchange is meant to reflect value derived from the transaction."